The In-State Equity Bias of State Pension Plans

47 Pages Posted: 16 Mar 2015 Last revised: 7 Dec 2020

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

Abstract

This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state’s primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state’s primary industry. We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.

Suggested Citation

Brown, Jeffrey R. and Pollet, Joshua Matthew and Weisbenner, Scott J., The In-State Equity Bias of State Pension Plans (March 2015). NBER Working Paper No. w21020, Available at SSRN: https://ssrn.com/abstract=2578848

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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University of Illinois College of Law ( email )

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Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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